Posts Tagged ‘Amartya Sen’

AusteritySurvivalGuide

There is something fundamentally unstable—and ultimately dangerous—about the liberal critique of austerity.

Consider the recent essay on “The Economic Consequences of Austerity” by Amartya Sen. On one hand, he correctly criticizes the austerity effects associated with the deficit-cutting measures that have been imposed in Western Europe in the years following the crash of 2007-08 (and reminds readers of Keynes’s critique of the austerity measures the Allied Powers were threatening to impose on Germany in the Treaty of Versailles).

But then Sen accepts, without any further argument, the need for “real institutional reform” in Europe: “from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets.”

In other words, Sen is attempting to distinguish between the “antibiotic” of institutional reform and the “rat poison” of austerity.

The instability of Sen’s formulation stems from the fact that he wants to reject one part of the conservative austerity agenda (dismantling some state programs) while accepting the other (making markets, especially labor markets, more “flexible”). The danger arises because Sen takes as a common sense, without need for any kind of extended argument, that one group of workers should be protected (in the form of pensions of those who have retired) while further costs should be imposed on the other part of the working-class (by raising the age of retirement and creating more “flexible” labor markets for those still working).

Ultimately, it’s Sen’s nostalgia for a time that, in his view, was characterized by “good public services and a flourishing market economy” that leads him to such an unstable and, in my view, dangerous set of propositions. Better, it seems to me, to recognize that that period of public-private exceptionalism has come and gone, undone by the common sense that capitalist growth needs to be preserved at all costs—and to reject not only the rat poison of austerity, but also what Sen and other liberals consider to be the antibiotic of imposing further costs on European workers.

amartya-sen-and-jagdish-bhagwati

It’s as if nothing has changed in the history of failures of mainstream development economics in the postwar period.

The latest episode is the current debate between Amartya Sen and Jagdish Bhagwati, which rehearses once again the false choice between redistribution and growth, or between government programs and free markets. The fact is, we’ve seen plenty of government programs (including spending on health and education) and plenty of experiments in free markets (including in India)—and a large portion of the world’s population (especially in India) remains in poverty.

Perhaps it’s time, then, to try something new. A new kind of analysis. And a new set of policies. Starting, as I have argued before, with a redistribution of assets. Unfortunately, that’s an option that is never even mentioned by either Sen or Bhagwati—or, for that matter, by anyone else in the mainstream debate about economic development.

A Dangerous Resolution. The Christian resolution to find the world ugly and bad, has made the world ugly and bad.

Amartya Sen began his University of Notre Dame Lecture in Ethics and Public Policy, “The Demands of Justice,” with the above quotation from Friedrich Nietzsche’s The Joyful Wisdom.

Sen then proceeded to explain (after gasps from the audience) that it really wasn’t Christianity’s fault. The world really is ugly and bad and, while perfect justice is an illusion, it’s necessary to eliminate instances of injustice wherever they exist.

Here’s Amartya Sen, from an interview with Olaf Storbeck and Dorit Heß.

Question: Professor Sen, do you have the impression that economists and economic policy makers are learning the right lessons from the most severe economic and financial crisis since the Great Depression?

Answer: I don’t think that at all. I’m quite disappointed by the nature of economic thinking as well as social thinking that connects economics with politics.

What’s going wrong?

Several features of policy making are worrying, particularly in Europe. The first is a democratic failure. An economic policy has to be ultimately something that people understand, appreciate and support. That’s what democracy is all about. The old idea of “no taxation without representation” is not there in Europe at the moment.

In which respect?

If you are living in a southern country, in Greece, and Portugal and Spain, the electorates views are much less important than the views of the bankers, the rating agencies and the financial institutions. One result of European monetary integration, without a political integration, is that the population of many of these countries has no voice. Economics is de-linked from the political base. That I think is a mistake and it goes completely against the big European movement that began in the 40s and fostered the idea of a democratic, united Europe. . .

You make a lot of references to old economic thinkers like Smith, Keynes and so on. However, if you look at the current economic research that is published in the journals and taught at universities, the history of economic thought does not play a big role anymore…

Yes, absolutely. The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.

In the world of Greg Mankiw (and of most neoclassical economists), the inequalities of capitalism can be described as “just deserts.”

The basic idea is that a free-market system allocates incomes according to (a) the marginal productivity of the factors of production (such as labor and capital) and (b) how much of those factors individuals choose to sell to enterprises (in the form of labor hours and savings). So, wages represent the return to not being lazy (and therefore working to earn an income), and profits the return to not being piggy (and therefore setting aside savings from income for future consumption).

Therefore, in the world of neoclassical economics, individuals get what they deserve.*

A reader reminded me of a classic essay by Amartya Sen, in which he challenges the theory of just deserts as expounded by P. T. Bauer. (Unfortunately, the essay is behind a paywall. But I was able to use my university library to retrieve the full text.)

Bauer has long been known as a critic of egalitarianism and of any and all schemes (especially in the context of Third World development) to use government policies to move toward more equal economic arrangements. Sen identifies four arguments Bauer uses to challenge egalitarianism: the economic differences that exist in society are

  1. deserved (in the sense that they are the result of people’s capacities and motivations)
  2. procedurally justified (because they are the product of voluntary arrangements)
  3. instrumentally useful (since they lead to higher living standards for all)
  4. better than the alternative (which is coercive measures on the part of governments)

 

Sen then proceeds to dismantle Bauer’s arguments, one by one. For the purposes of this post, let me focus on just one of them.

both the argument about who is deserving and the procedural argument ultimately turn on Bauer’s description of the process of production: that is, a rich person produces correspondingly more than a poor person. This description plays a crucial part in Bauer’s economic analysis—both of inequality within a country and of inequality across national boundaries, including the claims of the so-called third world. I shall call Bauer’s position here the “personal production view.”

Sen’s argument is that the personal production view is difficult to sustain in cases of “interdependent production.”

Production is based on the joint use of different resources, possibly provided by different people, and it is not in general possible to separate out who—or even which resource—produced how much of the total output. There is no obvious way of deciding that “this much” of the output is owing to labor, “that much” to raw materials, “that much” to machinery, and so on. In economic theory, a common method of attribution is according to “marginal product,” i.e., the extra output that one incremental unit of one resource will produce given the amounts of other resources. This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products only under some further special assumptions.

But even when all these assumptions have been made—quite a tall order—it is still arbitrary to assert that each resource’s earnings reflect the overall contribution made by that resource to the total output. There is nothing in the marginalist logic that establishes such an identification. Marginal product accounting, when consistent, is useful for deciding how to use additional resources so as to maximize profit, but it does not “show” which resource has “produced” how much of the total output. The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others.

Furthermore, when incomes generated by the production of different goods are compared, relative incomes depend on relative prices of the products, and this introduces an additional element of arbitrariness in the personal production view. You and I may continue to produce the same two goods in unchanged amounts in exactly the same way, but a change in the relative prices of our respective products (caused, say, by changing demand conditions having to do with the functioning of the rest of the economy) can make our relative incomes change without any change of anything that you and I are, in fact, doing or producing.

Finally, there is the need to distinguish between what a person produces and what is produced by resources that he happens to own. The moral appeal of giving more—in Bauer’s words—to “those who are more productive and contribute more to output” does not readily translate into giving more to “those who own more productive resources which contribute more to output.”

Note that this is a critique of the “personal production” theory of the distribution of income—a view shared by both Bauer and Mankiw, and with many other neoclassical economists—by a Nobel Prize-winning neoclassical economist. Sen’s conclusion is that

The personal production view thus confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources.” These ambiguities are crucial to its moral appeal. The personal production view, it must be concluded, is richer in powerful rhetoric than in substance.

Sen’s critique is a classic case of the neoclassical theory of income distribution, which underlies its social Darwinism, receiving its just deserts.

* Aside from market imperfections and externalities, the extent of which serves as the basis of argument between conservative and liberal neoclassical economists. The existence of public goods is how, within such a neoclassical world, Mankiw argues for progressive taxation and transfer payments to the poor—provided, that is, the rich actually value such public goods, i.e., they benefit more from them than others in society.